Target to convert more stores into Kmart in Australia

Wesfarmers, an Australian conglomerate, provided an update on the review of Target, including changes to the Target and Kmart store networks. The group also provided an update on significant items expected in the 2020 full-year results.

Following the completion of the first phase of the Target review, Kmart Group has identified a number of actions to accelerate the growth of Kmart and address the unsustainable financial performance of Target.

These actions include the conversion of suitable Target and Target Country stores to Kmart stores, the closure of between 10 to 25 large format Target stores, the closure of the remaining 50 small format Target Country stores, and a significant restructuring of the Target store support office. Wesfarmers is continuing its assessment of strategic options for a commercially viable Target and its remaining store network.

Wesfarmers Managing Director Rob Scott said that these actions and further investment in Kmart will enhance the overall position of the Kmart Group, while also improving the commercial viability of Target.

“For some time now, the retail sector has seen significant structural change and disruption, and we expect this trend to continue. With the exception of Target, Wesfarmers’ retail businesses are well-positioned to respond to the changes in consumer behaviour and competition associated with this disruption,” Mr Scott said.

“The actions announced reflect our continued focus on investing in Kmart, a business with a compelling customer offer and strong competitive advantages, while also improving the viability of Target by addressing some of its structural challenges by simplifying the business model. The reduction in the Target store network will be complemented by increased investment in our digital capabilities, following the continued strong growth in online sales across the Kmart Group and the pleasing progress in Catch since its acquisition in August 2019. The expansion of our digital offer will provide customers with access to the Kmart and Target products they love, together with over two million products from the Catch marketplace, via home delivery or click and collect,” continued Mr Scott.

Coinciding with the significant changes to the store networks in Kmart and Target, Kmart Group will complete the trial of Anko stores in Seattle, United States prior to the end of the financial year and close these operations. A number of the initiatives trialled are expected to be progressively implemented in Kmart stores.

Following the deterioration in economic conditions since the first-half results, Wesfarmers has also assessed the carrying value of the Industrial and Safety division and expects to recognise a non-cash impairment, primarily relating to the impairment of goodwill.

As a result of the actions, along with the recent partial sale of its interest in Coles, Wesfarmers expects to recognise the following significant items in its 2020 full-year results:

• Restructuring costs and provisions in Kmart Group of approximately $120 to $170 million before tax, primarily reflecting Target store closure costs, inventory write-offs and a reduction in the Target store support office

• Non-cash impairment in Kmart Group of approximately $430 to $480 million before tax, including an impairment of the Target brand name, property, plant and equipment, the capitalised value of leases and other assets

• Non-cash impairment in the Industrial and Safety division of approximately $300 million before tax, primarily relating to the impairment of goodwill

• Pre-tax gain on sale of 10.1 per cent interest in Coles of $290 million, and one-off pre-tax gain of $221 million on the revaluation of the remaining Coles investment.

The estimates of the significant items outlined above remain subject to auditor review. In the 2021 financial year, Kmart Group is also expected to incur one-off non-operating costs of approximately $120 to $140 million relating to the conversion of stores and stock clearance activity prior to closure or conversion.